Auntie Politics in the Board Room

How to resolve the conflicts within the boardrooms of Chinese family businesses

By Louisa Wah Hansen

Norris Yang, Executive Director of Hong Kong-based mediation and arbitration consultancy ADR International Limited and Chairman of the Communications and Publicity Committee of the Hong Kong Mediation Accreditation Association Limited, has given advice and mediation services to many family businesses. Most of these companies — based in Hong Kong with operations in mainland China — do not have professional managers, or “outsiders,” sitting on their board of directors. The exception is the large-scale or listed companies, in which case the lack of outsider managers would be a recipe for lackluster business performance, says Yang.

Typically, these Chinese family businesses operate under a patriarchal or matriarchal system, in which family bond is what glues the staff members together, according to Yang.

“If these companies are run by Chaozhouese (潮州人), Wenzhouese (温州人) or Fujianese (福建人) and not too big in size, things still have a way of working out. Families from other regions may be less cohesive and more conflicts may arise among extended family members, most likely when the spouses, children, in-laws or aunties and uncles are involved,” says Yang.

When a second- or third-generation member is brought into the board of directors or Top Management Team (TMT), there is a tendency for further conflicts to arise. Based on his observations, Yang says the younger members of the family businesses often have a need to prove themselves in the eyes of the old-timers. “Often, the only way to prove their abilities is to take risks,” he explains. “And you’re going to see a much higher level of risk-taking behavior than if you were to hire an outside manager, as the money isn’t hard-earned but inherited instead.”

Alternately, says Yang, some would-be successors would go the route of performing external duties that exhibit “filial piety” (reverence for the elder generation, considered a moral virtue in the Chinese tradition) to the business owners with the goal of obtaining more power or more shares within the company—or both.

According to Yang, one of the common strategies these so-called successors of the family businesses employ to prove themselves is to “deep-freeze” the old-timers and install new systems and “best practices,” some of which—such as Six Sigma (a measure of quality that strives for near perfection)— are a result of the knowledge they have acquired in their overseas studies and may not necessarily be applicable in a small-scale family-run operation. “This may actually sacrifice the efficiency of the business as the existing business culture may be reluctant to accept such drastic changes or to sustain them,” Yang points out.

Adding to the tangled web of family relationships within these companies is the introduction of an outside manager in the top management structure, thus creating the so-called “faultline,” as mentioned in our feature article.

When Outsiders Come into the Picture

There is good evidence that outside professional managers contribute positively to family businesses. For example, tycoon Li Ka-Shing’s Cheung Kong Limited achieved excellent performance and good public relations when outside professionals were hired to manage the company—this was before Li’s sons were brought into the helm.

However, the presence of outsiders in the TMT of a family business—or a strong faultline — may not necessarily lead to positive company performance in a straightforward way. There may be complications.

“Most outside professional managers hired to work in a family business would rather not criticize those family members in high positions, especially the younger generation members who have returned home from their overseas studies, newly minted with flashy Ivy League MBA degrees. In such a case, these professional managers either feel inferior or do not want to rock the boat,” explains Yang. He believes this phenomenon is especially true in the context of the Chinese culture, which can still be dominated by hierarchical thinking.

As a result, some outside managers may act in a way that would not risk their own career success within such companies. “The more successful non-family professional managers working for a micro-managing chairman are those who have graduated from Theater Lane,” says Yang — joking with the euphemism that refers to the shoe-shiners who work in Theater Lane in the Central District of Hong Kong. “Shoe-shiners” is a local slang that is equivalent to the American of “brown-nosers.”

The inefficiency resulting from such dynamics is one reason why it is at times difficult for some family fortunes to flow to the third generation—fulfilling a well-known Chinese prophetic saying (富不過三代), laments Yang. As the younger generation, who has never experienced poverty, no longer shares the same motivation as their parents or grandparents to succeed with their own hard work, says Yang, many of them are either doing a lackluster job in managing their family business or simply don’t want to carry on running it.

“My view is that the elder generation in a family business must learn to let go,” says Yang. “Sadly, many Chinese people are not willing to do so. They would rather let a relative run their business when they are too old to do so, than to hire outside professional managers.”

Are Insiders Necessarily More Trustworthy?

The reason why the elder generation of Chinese family businesses are not willing to “let go” boils down to the concept of the “trusted inner circle” (自己人), or guanxi (關係), as it is much easier to defer to the “Confucian moral teachings” and “family fidelity” than to the trust for “outsiders,” according to Yang. But he questions whether family members should automatically be granted the status of a “trusted party.”

“Participation of family members does not automatically exempt the business from experiencing outright frauds or incompetence,” observes Yang. “In fact, if you hire someone you don’t totally trust, it creates a heightened sense of alertness and puts you on your toes. As a result, you wouldn’t be cheated on so easily. The English word for ‘crisis’ translates into weiji (危機) in Chinese, a compound word made up of the words ‘danger’ and ‘opportunity.’ All crises have an element of ‘danger.’ Yet there is also an ‘opportunity’ to change or adapt to the future. It is therefore a positive thing.”

Another advantage of hiring outside professionals is that one can leverage on their experience, skills and business network, which may not necessarily be present within the family, says Yang. One example is marketing strategies and skills for the Internet Age, which is generally lacking among the elder family members of Chinese businesses.

Yang cites Li & Fung as an excellent example of a Chinese family business that has leveraged the talent and skills of numerous professional senior executives from outside the family. Its success suggests that having a clear “faultline” in the top management structure does help improve a company’s performance.

Whether the top management team is run by outsiders or family members, Yang believes that the most important thing is to establish clear-cut power boundaries. What does that mean? Yang gives the following example: If the son of the business owner returns from his overseas studies and joins the company, draw the line to show which areas of the business he should and should not touch.

“It is best to place him at the lowest rung of the company structure and allow him to work his way up to the highest position so that he will learn the ropes of how to run a business with hands-on experience — much the same way as Eric Hilton, the son of Conrad Hilton, founder of his namesake hotel chain, learned the hotel business by starting to work in the mailroom and then as a bell boy,” he says. “The other employees only knew him then as ‘Eric’ and even years later, his previous buddies would be his eyes and ears on the frontline, giving him valuable insights into his own hotels and the competitors.”